Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Making Cents in Penny Stocks

A low price doesn't always mean low quality.

The occasional shower of pennies from heaven might do our bank accounts some good. Alas, Fools can't say the same for penny stocks. They're often subject to manipulation and deceit, making it harder for investors to separate the few good offerings from the multitude best ignored.

Still, many investors enjoy dabbling at the low end of the stock-price spectrum. At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning investments there. We identify them with a penny icon.

Pinching penniesThis week, we'll look at some of the low-priced investments the CAPS community has singled out as those with the best chances of success by bestowing four- and five-star ratings on them. We just might want to turn our umbrellas upside-down to catch them!

The above three companies may be low-priced, but that isn't necessarily enough to suggest they'll have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. We have to check and see what their catalysts for growth might be before diving in to the shallow end of the stock pool.

Your two cents worthLike investors in CF Industries(NYSE: CF) and Mosaic(NYSE: MOS), when fertilizer producer Rentech reported earnings in May, they should have been prepared for the coming fallout. All those sales and profits they were earning as a result of larger corn crops would eventually have the chickens coming home to roost.

When the USDA announced farmers planted some 300 million bushels more than what was predicted just three weeks prior to the report, marking a new record, shares of fertilizer stocks dropped. Corn prices were falling, dragging down wheat with them. It might seem incongruous since more corn planted should mean more fertilizer used, but it likely means with less profits to be had there will be less corn planted. That in turn will mean less fertilizer needed.

As well as other on-going projects at Rialto and Port St. Joe. They have an attractive outlook with phased projects coming online in the next couple years. I believe this is a great opportunity to score an emerging stock at an unbelievable price.

Getting better all the timeNot the housing market, but rather the forces building up under the apartment rental industry. Housing is dead and homebuilders are zombies that just don't know it. We're not going to see any appreciable recovery in the industry for years to come because it wasn't allowed to correct itself so there's still a massive overhang of inventory out there.

So if people aren't buying houses but still need a place to live, that means they'll be turning to apartments as the next best thing. Because of its severely beaten down stock price, RAIT Financial Trust might represent an excellent opportunity.

Like peer UDR, RAIT is a REIT focused on the real estate financing market, but two-thirds of its portfolio is in multifamily properties. But unlike UDR, RAIT's properties are dispersed across the country, but with nearly 20% in Texas, which didn't experience the same level of price appreciation as other markets did during the boom. In contrast, UDR has 11% of its properties in Orange County, Calif., alone.

The housing crisis was particularly acute there, making apartments in the area even more attractive. As a result, UDR's shares have appreciated more than 30% over the past year. But RAIT is profitable compared to UDR's widening losses and its discounted price puts it in bargain territory.

Management seem focused in expand get more adquisitions and is raising some funds to make that adquisitions. Seem is aware of the debt and is dealing with that issue also. Real estate also is showing a very small improve, so for now is a matter of patience.

A good betOne of the catalysts for voice and data infrastructure provider Sonus Networks is its position as a possible acquisition target. With Cisco(Nasdaq: CSCO) still reeling from the loss of market share and margin compression its experienced, the industry giant is often thought of as a likely candidate. And with Sonus posting consecutive losses now, its stock is getting cheaper and thus potentially more attractive, giving someone like Cisco a better lever to use against Acme Packet or Tellabs(Nasdaq: TLAB).

The one holdback is Sonus' poison-pill defense, which would likely scare off any suitors. Highly rated CAPS All-Star tenmiles recently thought the expiration of the anti-shareholder friendly defense could help the situation, but management just moved to extend the rights agreement another two years. It says there hasn't been any particular interest in the company, but they want to remain entrenched.

All but one CAPS All-Star sees Sonus beating the Street, but you can track of what management is up to by adding the stock to the Fool's free portfolio tracker and following along on its progress.

Penny for your thoughtsShould we fill up the change jar with these penny stocks, or ignore 'em like a discarded coin on the street? Consult our free CAPS investor-intelligence community, where your two cents count as much as anyone else's.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow him on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.